Why Isn’t Hulu Better?

Executive Summary

When Hulu was launched, in 2008, it had the backing of three major motion-picture studios—21st Century Fox, NBC Universal, and Walt Disney Studios/ABC Television. The service seemed poised to dominate video distribution online—but today it ranks only 8th among streaming services, far behind Netflix, YouTube, and Amazon Prime Video. What happened? From its inception, it turns out, the service faced two major obstacles to success: its ownership structure, which discouraged its members from sharing their most valuable content; and the organizational structure of its members, which focused on their traditional model of doing business, rather than on streaming. But streaming is the future of the entertainment industry, the authors write, and Hulu will only succeed if it acknowledges that truth and adapts its business model accordingly—which, promisingly, it has begun to do.

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Over the past year, major studios have aggressively and innovatively changed their business models to enter the streaming wars. With the recent announcements of new streaming offerings from Disney and WarnerMedia, now seems like the right time to consider an important historical question: Why isn’t Hulu better?

That probably sounds harsh, even unfair. After all, Hulu was an innovative offering when it was first announced in 2007, less than a month after Netflix entered the streaming business. Launched in 2008, the service was created out of a novel partnership between three of the largest motion-picture studios, 21st Century Fox, NBC Universal, and Walt Disney Studios/ABC Television, giving it a key competitive advantage over Netflix: access to those studios’ valuable catalogs. In the decade since its launch, the company has certainly had its share of success. Its shows have received 47 Emmy Award nominations and six Golden Globe nominations, and by the end of 2018 had more than 25 million subscribers. That sounds great, right?

Sure, until you compare it to Netflix. During that same period, Netflix received 336 Emmy nominations and 53 Golden Globe nominations—and by the end of 2018, the company had amassed 139 million subscribers. In its initial 2007 press release, Hulu promised to become “the largest Internet video distribution network ever assembled with the most sought-after content from television and film,” but by 2018 the company was just the 8th most popular streaming platform online, capturing only 0.4% of global Internet traffic—well behind the market leaders Netflix (26.6% of global Internet video traffic), YouTube (21.3%), and Amazon Prime Video (5.7%).

Given Hulu’s initial promise, what happened?

To answer that question, you need to recognize that from its inception, Hulu faced two nearly insurmountable obstacles to success.

The first came from its ownership structure. Paradoxically, what the company initially touted as its greatest strength—a partnership between three dominant studios—was actually a systematic weakness. Consider the challenge of convincing a studio to provide its content to a platform it shares with two of its major competitors. If you were an executive at NBC Universal, would you put your most valuable content on Hulu if you knew that two-thirds of the benefits from that investment would go to Fox and Disney?

The good news is that in the past month this problem has mostly been solved. When Disney completed its acquisition of 21st Century Fox, the combination of each company’s 30% share in Hulu meant that, for the first time, Hulu had an owner with a majority stake in the company. And when WarnerMedia sold its stake in Hulu earlier this week, Hulu’s ownership structure became even simpler, with only Disney (66%) and Comcast (34%) remaining as co-owners.

But that brings us to the second—and more important—obstacle: the organizational structure of Hulu’s members. Hulu’s problem, and the problem we believe each major studio will face as it enters the streaming market, is that it’s hard to fully realize the benefits of a new business model when your organizational structure is designed to protect the old one.

Until recently, each studio was organized into separate divisions that supported the theatrical, home-entertainment, television, and international businesses. For most of the twentieth century, that organizational structure made perfect sense, because it allowed studios to capitalize on how content had always been distributed: in separate domestic and international releases, first in theaters, later for à la carte viewing at home, and ultimately on ad-supported broadcast-television channels.

But selling content in on-demand bundles isn’t just an add-on window to the theatrical, home-entertainment, and television releases. As we’ve argued previously, it represents a fundamentally new way of creating, distributing, and profitingfrom content. But unless you align your organizational structure with that new opportunity, your existing divisions will fight to maintain the profitability of their established revenue streams. That’s exactly what happened to Hulu. The company quickly discovered that no one in the theatrical, home-entertainment, or even television divisions of their partner studios wanted to put their best content on Hulu’s streaming platform. Studio managers knew that sharing content with Hulu would hurt their ability to make their quarterly numbers, and might even damage their long-term power in the organization if on-demand streaming became successful.

To see what we mean, consider the problem of international television licensing. When we criticized Hulu above for not having a larger global presence compared to Netflix, Amazon, and YouTube, that might have seemed unfair. Hulu is only available in the United States, so by definition its international penetration will be zero. But that’s the point! There’s no technical reason for the company to limit itself to the U.S. market. It does so because it wants to protect its member studios’ valuable international licensing businesses. That might have made sense in 2008, but it’s counterproductive today. As the on-demand streaming model gains ascendency, the studios will find themselves competing for international customers who are already loyal to existing offerings from Netflix, Amazon, and Google.

So what can the studios do? Maybe something similar to the organizational restructuring that took place at WarnerMedia last month. The effort, led by the AT&T veteran John Stankey, involved replacing the existing theatrical, home-entertainment, and television business units with a new organizational structure focused on direct-to-consumer entertainment, live sports and news programming, content production, and advertising. Many industry observers criticized the move as a desperate effort to cut costs, or as revealing a deep disconnect between the telecommunications culture and the prevailing culture in entertainment. We see it very differently. Stankey’s reorganization signaled a dramatic shift in focus—away from the analog business of selling individual shows to large audiences, and toward a digital business focused on giving individual consumers convenient access to a diverse bundle of content.

This story is far from over, and it would be foolish to underestimate the studios’ ability to thrive in the digital streaming wars. As people who love great entertainment and believe in the power of competition, we’re rooting for them to succeed, either through Hulu in its new incarnation, or platforms like those announced by Disney+ and WarnerMedia, or in other still-to-be determined ways. Whether they do, however, will depend on how quickly and nimbly they can act on a simple truth that not everybody has yet accepted: digital platforms are central to the future of the industry.

Michael D. Smith is a professor of information technology and marketing at Carnegie Mellon’s Heinz College and Tepper School of Business.

Rahul Telang is a professor of information systems and management at Heinz College.